European Economic Integration

European Economic Integration

European Economic Integration

Twenty-five economists from the United States and Europe met in Cambridge on August 3-4 for a conference on "European Economic Integration: Towards 1992" sponsored by the NBER and the Centre for Economic Policy Research (CEPR). Willem H. Buiter, of NBER, Yale University, and CEPR, organized the following program:

Jeffrey D. Sachs, NBER and Harvard University; and

Xavier Sala-I-Martin, Harvard University, "Federal

Fiscal Policy and Currency Unions: Some Lessons

for Europe from the United States"

Discussant: Willem H. Buiter

Francesco Giavazzi, NBER, University of Bologna,

and CEPR; and Marco Pagano, University of Naples

and CEPR, "Confidence Crises and Public Debt

Management"

Discussant: Kenneth Kletzer, Yale University

Clas Wihlborg, Gothenburg University and University

of Southern California, "Exchange Rate

Arrangements for the Transition to a Common Currency"

(jointly with Thomas Willett, University of

Southern California)

Discussant: Vittorio U. Grilli, NBER, Yale University,

and CEPR

Richard E. Baldwin, NBER and Columbia University,

"On the Growth Effects of 1992" (This paper is

described in "International Seminar on

Macroeconomics.")

Discussant: David Ulph, University of Bristol and

CEPR

Rick van der Ploeg, Center for Economic Research,

Tilburg University, and CEPR, "Fiscal Aspects of

Monetary Integration in Europe"

Discussant: Silvio Borner, University of Basel

Damien J. Neven, INSEAD and CEPR, "European

Integration and Trade Flows" (jointly with Lars-Hendrik

Roller, INSEAD)

Discussant: Alan Winters, University College of North

Wales and CEPR

Vittorio U. Grilli and Nouriel Roubini, NBER and Yale

University, "Financial Integration, Liquidity, and

Exchange Rates"

Discussant: Lars E. O. Svensson, NBER and

University of Stockholm

Sachs and Sala-I-Martin discuss the role of a federal fiscal government in a monetary union. They argue that a monetary union is more likely to survive if it is accompanied by a federal government that redistributes income from positively to adversely shocked regions so as to make nominal exchange rate adjustments less necessary. They find that, within the United States, a one dollar negative shock to the average U.S. region triggers higher federal transfers (between 6 and 10 cents) and lower federal taxes (between 28 and 30 cents), so the decrease in disposable income is only about 62 to 65 cents. Hence, more than one-third of the shock is absorbed by the federal government and most of the action comes from the tax side. They suggest that, without a fiscal union, a European Monetary Union (EMU) is not likely to survive.

Giavazzi and Pagano argue that under free capital mobility, confidence crises can result in devaluations if fiscal authorities can obtain temporary money financing, even when fixed exchange rates are viable. During a crisis, domestic interest rates increase, reflecting the expected devaluation. Rather than selling debt at punitive rates, fiscal authorities may turn to temporary money financing, leading to equilibriums with positive probability of devaluation. These equilibriums can be ruled out if the amount of debt maturing during the crisis is sufficiently small: a condition that can be met by reducing the stock of public debt, lengthening its average maturity, and/or smoothing the time distribution of maturing issues.

Wihlborg analyzes the transition from the current "fixed but adjustable" exchange rate system among most members of the European Community (EC) to an irrevocably fixed system within which a common currency gradually would be substituted for the old national currencies. …

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